CHAPTER III GOODS AND SERVICE TAX A GLOBAL EXPERIENCE

Transcription

1 CHAPTER III GOODS AND SERVICE TAX A GLOBAL EXPERIENCE

2 3.1 ORIGIN 3.2 BACKGROUND 3.3 AN INTEGRATED REGIME BIRTH OF AN IDEA 3.4 SIGNIFICANCE OF GST 3.5 IMPACT OF GST 3.6 GST THE ROAD MAP AND THE CHALLENGES 3.7 CONSTITUTIONAL AMENDMENT ON TAXATION POWER 3.8 GST AND ITS OPERATIONS 3.9 GST MODELS 3.10 GST ALTERNATIVE MODELS AND ISSUES 3.11 OVERVIEW OF THE DISCUSSION PAPER ON GST 3.12 CHRONOLOGY FOR IMPLEMENTATION OF GST 3.13 OPERATIONAL DEFINITION OF GST 3.14 PROPOSED FEATURES IN INDIAN CONTEXT 3.15 DESIRABLE FEATURES OF GSTN AN IT INFRASTRUCTURE FOR GST 3.16 STAKEHOLDERS 3.17 WORKFLOWS 3.18 A COMMON GST PORTAL 3.19 GLOBAL EXPERIENCES IN GOODS AND SERVICES TAX 3.20 STRIKING BALANCE 3.21 MISSION MODE PROJECT ON COMMERCIAL TAXES

3 Chapter-III GOODS AND SERVICE TAX AN GLOBAL EXPERIENCE GST is a comprehensive value added tax on goods and services. It is collected on value added at each stage of sale and purchase in the supply chain without State boundaries. The success of GST depends on proper administration. Much will depend on its simplicity and efficient implementation, which are even more difficult in a disparate federal setup ORIGIN Goods and Services Tax also known as the Value Added Tax (VAT) or Harmonized Sales Tax (HST) was first devised by a German economist during the 18th century. He envisioned a sales tax on goods that did not affect the cost of manufacture or distribution but was collected on the final price charged to the consumer. The numbers of transactions are immaterial and the tax is at a fixed percentage of the final price. The tax was finally adopted by France in Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was the first to introduce VAT on April 10, Initially directed at large businesses, it was extended over time to include all business sectors. 3.2 BACKGROUND The Indian indirect tax regime is characterized by multiple levies, such as excise duty, Customs duty, VAT, Central sales tax, service tax, and including local levies, such as octroi and entry tax. Historically, none of these taxes were creditable against one another, barring a part of the Customs duty and excise; over the last few years, service tax has also been brought into the creditable basket. The excise duties, Customs duties and service tax belong to one basket of creditable taxes, VAT, Central sales tax and octroi belong to another basket of entirely non-creditable taxes. 1 Sukumar Mukhopadhyay -Former Member, Central Board of Excise & Customs, Business Environment, Chartered Financial Ananlysts, April 2008, P

4 The Central Government to levy certain taxes, and the State Government to levy certain other taxes-this distribution of power was clear and unequivocal. As a result, over the last six decades, both the Central and the State Governments have steadfastly worked at refining and expanding their respective tax regimes, but as the saying goes, the twain never met. In fact, until the introduction of VAT recently, even a single regime such as sales tax often entailed multiple levies, since sales tax levied across different States was largely non-creditable. 3.3 AN INTEGRATED REGIME BIRTH OF AN IDEA By the turn of the century, it was largely recognized that the existing regime of multiple (and largely non-creditable taxes) needed to go. Hence, the Central and State Governments worked at arriving by evolving a new regime; while there were considerable hiccups in the process, States eventually agreed to a gradual overhaul of the indirect tax regime in two significant phases: The first being the replacement of the erstwhile sales tax regime with a relatively more uniform VAT regime across many States coupled with the gradual elimination of the Central Sales Tax, and The second being the eventual merger of all of these into an integrated system of Goods and Services Tax (GST) by The proposed goods and services tax (GST) is in fact the brainchild of Ex-Finance Minister Mr. P. Chidambaram. It is be a multi-stage consumption tax to be imposed on wide range of goods and services. The process of introduction of VAT started in 2003 but was completed recently. The rate of Central sales tax has been reduced from 4% to (proposed) 2%, and is expected to be fully removed by the time GST is introduced. 3.4 SIGNIFICANCE OF GST Introduction of GST would result in abolition of multiple types of taxes on goods and services. 2 Reduces effective rates of tax to one or two floor rates. Reduces compliance cost and increases voluntary compliance. Removes cascading effect of taxation and removes distortion in the economy. 2 C.A Dr.A.L.Saini, Goods and Services Tax- A Paradigm Shift, Journal of Goods and Service Taxes Cases May P

5 Enhances manufacturing and distribution efficiency, reduces cost of production of goods and services, increases demand and production of goods and services. As it is neutral to business processes, business models, organization structure, geographic location and product substitutes, it will promote economic efficiency and sustainable long-term economic growth. Will give competitive edge in international market for goods and services produced in India, leading to increased exports. Reduces litigation, harassment and corruption. Will result in widening tax base and increased revenue to the Centre and State. Reduces administrative cost for the Government. 3.5 IMPACT OF GST The most significant impact of the introduction of GST will be the removal of the cascading effect of the various taxes, since in an ideal GST scenario; all indirect taxes will be creditable against one another. The overall impact of taxes on businesses is reduced. Besides, the artificial (tax) barriers to trade that currently exist should be fully removed. All of these, coupled with the relative clarity that a GST regime offers, should result in the reduction or rationalization of prices. Another equally significant offshoot of this regime is streamlining of the administration and collection of the indirect levies, since GST will attempt to tax the value added at each stage of the supply chain. The government revenue is not boosted but brings to book many of the defaulters, and hence results in the creation of a robust tax regime Impact on purchase of goods under GST In the current scenario, purchase of goods ordinarily is subject to VAT/ CST and in case the goods are purchased from a manufacturer, the purchase is also subject to excise duty. In the GST regime, interstate purchases would be subject to IGST and local purchases would be subject to CGST and SGST. The Exhibit: 3.1 illustrate the impact of GST. 120

6 Exhibit: 3.1 Impact on purchase of goods under GST Source: Concept Paper - Goods & Services Tax in India & Role of Chartered Accountants, The Institute of Chartered Accountants of India, June Note: The corollary to the above would be the impact on sales. 121

7 3.5.2 Impact on procurement of services under GST In the current scenario, procurement of taxable services would be subject to service tax. Considering that service tax is levied by the Central Government, the tax would be the same, whether procured locally or interstate. In the GST regime, services procured from outside the State would be subject to IGST and services procured from within the State, would be subject to CGST and SGST. The below Exhibit: 3.2 illustrate the impact. Exhibit: 3.2 Impact on procurement of services under GST Source: Concept Paper - Goods & Services Tax in India & Role of Chartered Accountants, The Institute of Chartered Accountants of India, June Note: The corollary to the above would be the impact on rendering of services. 122

8 3.6 GST THE ROAD MAP AND THE CHALLENGES The concept of the desirable and aspiration form of GST for India has been, and remains, evolving. Initially, GST was intended as a fully-integrated system encompassing within itself all of the existing indirect taxes. Clearly, this is no mean task and apart from the political and economic will, it also requires some significant changes in the Constitutional distribution of power. 3.7 CONSTITUTIONAL AMENDMENT ON TAXATION POWER 3. The constitutional amendment on taxation powers are given below in the following Exhibit 3.3. Exhibit: 3.3 Constitutional Amendments in Taxation Powers Taxation Powers Union List Income Tax - Excise Duty Customs Duty -Service Tax Central Sales Tax -Rates of Stamp Duty State List VAT Toll Tax Excise Duty Taxes on others -Land Revenue -Tax on Agricultural income -Stamp Duty Concurrent List Stamp Duties (not including Rates) Source: Abhishek A. Rastogi ACA, Taxmann s Guide to Goods & Service Tax, New face of indirect taxes in India, Taxmann Publications Pvt..Ltd, New Delhi-2009.P An indicator of the magnitude of the task is the recent sound bytes that have been (reportedly) attributed to the specially constituted Joint Working Group and the larger Empowered Committee of State Finance Ministers, which is tasked with the 3 Abhishek A. Rastogi ACA, TAXMANN S GUIDE TO GOODS & SERVICE TAX,New face of indirect taxes in India, Taxmann Publications Pvt..Ltd, New Delhi P

9 responsibility of looking into and ensuring the implementation of GST. The Working Group has submitted its findings to the Committee. While Group s findings, the likely form of GST that India will adopt is that of dual GST: a Central tax and separate State level taxes GST AND ITS OPERATIONS In GST regime, goods and services are not differentiated as it moves through the supply chain. The fundamental feature of GST is the eligibility of the manufacturers and dealers to claim credit for input tax paid at each stage without any limit or the barriers of State boundaries till it reaches the ultimate consumer. In GST structure, different stages of production and distribution are interpreted as a mere tax passthrough, and the incidence of tax is essentially borne by the final consumer within a taxing jurisdiction. A well-designed GST on all goods and services is the most efficient method of taxation to eliminate distortions. In the Indian context, if GST is implemented in real form, it would integrate all taxes currently levied in India by Central and State governments on goods and services like excise duty, service tax, State VAT/sales tax, entry tax or octroi, State excise, countervailing Custom duty, telecom license fee, luxury tax, tax on consumption/ sale of electricity, entertainment tax etc Global scenario and GST More than 150 countries have introduced GST/National VAT in some form. It has been a part of the tax system in Europe for the past 50 years and is the preferred form of the indirect tax in the Asia-Pacific region. There are different models of GST currently in force, each with its own peculiarities. While country such as Singapore virtually taxes everything at a single rate, some countries have more than one rate (a zero rate, certain exemptions and higher and lower rates). In some countries it is recoverable only on goods used in the production process and specified service. The standard GST rates in most of the countries ranges between 15-20% which is shown in the Table: 3.1. In Scandinavian countries (north Europe) where social security coverage is higher, it ranges between percent. 4 Sukumar Mukhopadhyay -Former Member, Central Board of Excise & Customs, Business Environment, Chartered Financial Ananlysts, April 2008,P

10 Table: 3.1 Global GST rates Country Standard Rate Country Standard Rate Country Standard Rate Austria 20 Greece 18 Norway 25 Belgium 21 Argentina 21 Denmark 25 Portugal 19 Chile 19 Sweden 25 Ireland 21 Spain 16 Finland 22 Poland 22 Romania 19 Italy 20 France 19.6 Luxembourg 15 Switzerland 7.6 Germany 16 Netherlands 19 U.K 17.5 Australia 10 Columbia 16 Maldova 20 Barbados 15 Japan 5 Indonesia 10 Canada 7 Mexico 15 China 16 Botswana 10 Latvia 18 South Africa 14 Zambia 17.5 Source: In India, the standard rate of excise duty is 16% on manufacture s sale price. In addition there is a State VAT at 4% and 12.5, at a lower end with 4% VAT it works out to 13.5%. It is feasible to fix tax neutral GST rate of 20% (less if existing duty exemptions are reduced) covering both Central and State s revenue share. 5 They (European countries) have kept the standard rate at 15 per cent and there is a band which ranges between 15 per cent and 25 per cent. So, there is flexibility, which we were also demanding. Also, there is a reduced rate of five per cent. They also have exemption thresholds. 6 5 The Associated Chambers of Commerce and Industry of India, GST: Imperative for Economic Growth-GST Road map, New Delhi Jan Business Standard Tuesday, Sep 27, 2011 Pg 6 125

11 Exhibit: 3.4 Global GST rates GST rates : International Experience Austria Belgium Portugal Ireland Poland France Germany Australia Barbados Canada Botswana Zambia Greece Argentina Chile Spain Romania Luxembourg Netherlands Columbia Japan Mexico Latvia Norway Denmark Sweden Finland Italy Switzerland U.K Maldova Indonesia China South Africa Source: 126

12 3.9 GST MODELS The proposed GST regime is a great milestone in the legislative history of indirect taxation and is a foundation of a new era in the indirect tax administration of the country. The States have not given its consent on the proposed structure. As the basic intricacies of the unified tax are still not finalized it is imperative to examine the various GST models. The indirect tax models can be derived on the basis of point of levy, number of levies, and the credit mechanism. In other words, the variety of models for taxation of goods and services can be derived from a combination of: Origin based single point levy- The present excise duty structure is an instance of origin based levy and the duty is levied at the time of manufacture. Destination based single point levy- Retail sales tax is a comparable instance. Destination based multi point levy with input tax credit mechanism- GST which is prevalent in various countries and is proposed to be implemented in India GST ALTERNATIVE MODELS AND ISSUES Design of a GST model involves three key components Determination of the system origin based, destination based, and single point, multi point and so on identification of activities and/or goods and services to be covered under each system determination of level of government imposing and collecting GST. There is a fair degree of consensus in India tax as system is concerned. There is fair degree of consensus on coverage of activities and goods and services. India will continue to have Customs duty which would not be rebatable and rest of the principal taxes i.e. CENVAT, State VAT and Service Taxes would form part of proposed GST. Few other issues remain to be addressed like a) whether stamp duty should also become part of GST? b) Which is other taxes being levied by each of the States and c) Whether they should become part of GST or remain out of it? Stamp duty, being more in the nature of tax on property, rather than on transaction, ought to remain outside GST as is agreements involving sale of goods and/or provision of services. The other issue relates to Octroi duty 127

13 which is currently levied by various municipalities and, in some cases, by States on entry of goods in the local area for use, consumption or sale therein. This should be merged with GST and a mechanism to transfer resources to local authorities from out of the total revenues of the States needs to be worked out. The third key component is consensus building. This component of the design is relevant for a country having federal structure of governance (e.g. Canada, Brazil or, for that matter, even European Union). There are three alternatives in this context: GST at Union Government Level only (Alternative I) GST at State Government Level only (Alternative II) GST at both, Union and State Government Levels (Alternative III) Canada has GST at Union Level extending to all goods and services covering all stages of value addition. In addition, there is tax at province (State) level in different forms which include VAT, Retail Sales tax and so on. European Union (EU) nations (each one is independent nation but, part of a Union and have agreed to adopt common principles for taxation of goods and services) have adopted classic VAT. In Indian context, an additional dimension is added by the provisions of Constitution which specifically reserve power to impose tax on specific activities to specific level of government Alternative I: GST at Union Level Only This Model envisages principal indirect taxes on goods and services to be levied by Union Government only. No such taxes to be levied by State Governments leading to only one GST throughout the country. The merits are a) Ideal structure from business perspective greater stability and facilitation of decision making; b) businesses will have to deal with only one tax authority and comply with only one tax there will be significant reduction of compliance costs; c) Excellent from consumer prospective as the consumer will know exactly how much is indirect-tax burden in the goods and service consumed by it; d) Cascading effect can be removed to a large extent as there will not be taxes at two levels leading to improved competitiveness; e) 128

14 Feel good factor for any one doing business with the country. The Constraints are a) Near impossibility of achieving the structure will require modification of Constitution; b) States may not agree to give up power of taxation and depend on the Union for resources; c) Entire infrastructure developed for taxation at both levels will have to undergo huge change Alternative II GST at State level only This Model envisages levy of GST by State Governments only meaning only State Specific GST across the country and no GST by Union Government. The positive factor is Reduction of cascading effect of taxes as there will not be tax at two levels. The limitations are a) Amendment(s), will be required in Constitution which may be supported by industrial and large States and opposed by smaller States which do not have significant source of revenues; b) Businesses will have to comply with tax laws of each State not worse off that current situation but not better off as well except that they will not have to deal with Central Level taxation which is the current position; c) Decision making will be impacted and may affect business stability; d) Governments, both local and Union will not find it workable as it will require complete change in its finances and allocation of resources entire distribution of taxes will need to undergo changes; e) Centre can retain entire direct tax collection and States may retain indirect taxation collection; f) There may be unhealthy competition among States using local tax structure as a tool to attract investments within the States, which may be at the cost of other States. This could lead to retaliatory measures by other States; g) Entire infrastructure for taxation will have to undergo change as States will need additional resources whereas Union s infrastructure will be freed up. 129

15 Alternative III GST at both levels This model envisages GST at two levels operating parallelly one, at Union Level and another at State Level. The relative significance a) This model is achievable in the short term; b) No significant change required in the current structure of indirect taxation although, some amendments may be required to the Constitution; c) It removes the cascading effect of taxes to some extent; d) No change required in infrastructure of tax departments at the Union and State levels The shortcomings are a) Not ideal model tax would continue to be at two levels and compliance costs may not reduce significantly; b) Constitutional amendments may be required principal one being extension of CENVAT to the consumer level and granting authority to States to impose taxes on Services. Proposed GST Model The existing multiplicity of taxes under present regime will undergo total change with the introduction of Goods and Services Tax (GST) with effect from April Goods and Service Tax is a destination based tax or a consumption based tax which can be termed as a consumption tax collected on the value-addition made in the goods and services at each stage of the supply chain. The seller of such goods or provider of services can take input credit of the tax paid. Unlike the existing tax regime, cross utilization of credit is possible under GST which would help to lower the taxes on production. The cost to the ultimate consumer will also be lowered. GST is intended to lower the tax structure, boost the trade and industry, cost of compliance and lessen litigation. GST would subsume all the indirect taxes as above expect Customs duty and Octroi. Though no official information is available on the details of the GST implementation, India is likely going to have a dual GST with rate pegged between 16% and 20%. There are quite a few challenges that will haunt the trade and industry during the GST implementation which are procedural (1) Transition method (2) Unfulfilled obligations under FTP scheme (3) Pending litigations (4) Refunds (5) Import transactions (6) Dispute Resolution (7) Assessment and scrutiny (8) Preparedness of the authorities, etc. Under GST, exemptions will be minimal and there will be no Zero tax rate. Services being taxed at 130

16 10% will be costlier under GST. GST models relevant to the Indian context are listed below: Concurrent Dual GST Non-concurrent Dual GST National GST State GST. The above mentioned models and the key aspects of each of them are summarized in the Table: 3.2 below: Table: 3.2 GST Models Key Aspect Requirement for Constitutional amendment in Indian context Revenue Sharing Example Concurrent Dual GST Tax levied concurrently by Centre and States Nonconcurrent Dual GST GST on goods to be levied by State and GST on services to be levied by Centre National GST Tax levied only be Centre State GST Yes No Yes Yes No Canada and Brazil The Centre may partly or fully transfer the revenues collected from the taxation of services Similar to present Indian indirect tax structure in many ways but of course not identical Yes Australia USA State law and collection by; States Reduction in fiscal transfers from Centre to State Source: Institute of Cost Accountants of India, Concept Paper, GST Model for India-Suggestions,

17 Concurrent Dual GST This model in common parlance is generally referred to as a dual GST model. Under this model, there is a Central GST (CGST) and a State GST (SGST) and each of the tax is levied on a comprehensive base comprising both goods and services. In other words, supply of goods and services attracts both CGST and SGST. It is pertinent to mention that both CGST and SGST can be merged into a single national GST (Model 3) with an appropriate sharing of revenues between the Centre and the States. The federal structure of the Indian Constitution, is concerned dual GST is a political necessity. Under the Dual GST model, the tax is levied concurrently by both the Centre and the States. Not only the Central Government but also the Empowered Committee has shown positive signals in favour of the Dual GST model OVERVIEW OF THE DISCUSSION PAPER ON GST The key features of the proposed GST as laid down in the discussion paper provide a very interesting and useful first reference for any discussion of GST in India. As a beginning, the design proposed in the paper provides considerable detail and structure to the new regime. The key features are summarized as follows: Dual GST: A Central and a State GST to be applied on the same base. Each tax would operate on the principles of input tax credit, where tax credit for each tax would be self-contained. No cross-credit would be allowed except in the case of interstate transactions. For interstate transactions, the discussion paper proposes a regime called IGST, wherein the exporter charges IGST in place of the GST in such transactions; claims input tax credit for any taxes paid, and remits the balance to the Central government. The exporting State remits any local taxes that are claimed as credit by the exporter to the Central government/central administrator. In the importing State, the importing dealer is allowed to claim tax credit for the IGST paid from the Central government. The claims across States will be cleared by a Central clearing house kind of mechanism. It is proposed to cover both B-B and B-C transactions. 7 Abhishek A. Rastogi ACA, TAXMANN S GUIDE TO GOODS & SERVICE TAX, A comprehensive & illustrated guide to goods and services tax, Taxmann Publications Pvt.Ltd,New Delhi-2010.P

18 Uniform State GST threshold is desirable proposed at Rs. 10 lakh: Threshold for Central GST for goods could be kept at Rs.1.5 Crore and for Central GST on services may also be appropriately high. For composition scheme - upper limit of Rs. 50 lakh and a floor rate of 0.5% across the States, with option for GST registration if desired. Rate Structure: Apart from exemptions for all commodities presently exempt in the State VAT system, it is proposed to have two rates a lower rate for necessary items and goods of basic importance and a standard rate. It is suggested that a similar approach be adopted by the centre for taxation of goods. For services, however, a single rate is proposed. It is also proposed that all exports out of the country will be zero-rated and all imports into the country would be subject to GST, with credit being made available in subsequent transactions. Central and State taxes to be subsumed in GST include Central excise, additional excise duties, service tax, additional Customs duty, special additional duty of Customs, surcharges and cesses, for the centre and State VAT, entertainment tax, luxury tax, betting taxes, State cesses and surcharges on supply of goods and entry tax not in lieu of octroi. On purchase tax there is no clear view. On tobacco, alcohol and petroleum products, it is proposed that status quo remains. In other words, alcoholic products and tobacco would be subject to GST, with traditional excises imposed by States on the former and centre on the latter in the case of petroleum products, it is proposed that crude, motor spirits, diesel and ATF would be kept outside GST. Multiple Statutes: One for the centre and one each for the States. The discussion paper proposes that the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification, etc, would be uniform across these statutes as far as practicable. 8 Rules for taking and utilization of credit for the Central GST and the State GST would be aligned. To the extent 8 R Kavitha Rao, Pinaki Chakraborty, Goods and service tax in India: An assessment of the base,january 2,2010 VOL XLV NO1 Economic and political weekly, p.no

19 feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation: while separate returns are mandates for the two taxes, it is proposed to aim for a common format. Tax administration by respective tax departments: Timely refund, when credit accumulation takes place by designing interconnectivity between different tax departments. For sharing of information between the different tax departments, administrations including income tax a PAN-linked tax payer identification number are to be allotted. The following are the points of distinction between the Empowered Committee of the State Finance Ministers and the Report of the Thirteenth Finance Commission Task Force on GST. However to introduce the GST successfully in India, the Centre and State Governments must reach a consensus on the structure of GST RATE OF TAX: According to the Empowered Committee, there should be multiple SGST rates for goods. Standard rate i.e. 7% - 8% and lower rate i.e. 4%-5%. Single rate for services (both for CGST and SGST. On the other hand, single rate of GST for all goods and services i.e. 5% for CGST and 7%for SGST is put forward by Thirteenth Finance Commission. THRESHOLD LEVEL: According to the Empowered Committee, multiple thresholds for SGST to be Rs 1 million and proposed threshold for CGST to be Rs 15 million. On the other hand, uniform threshold i.e. Rs 1 million for both CGST and SGST is put forward by Thirteenth Finance Commission. TAXES TO BE SUBSUMED: According to the Empowered Committee, subsume most of the transaction based levies but may exclude octroi, purchase tax on food grains, electricity cess, stamp duties. On the other hand, subsume purchase tax, stamp duty, electricity duty is put forward by Thirteenth Finance Commission. ECONOMY COVERAGE: According to the Empowered Committee, Alcoholic products and Petroleum Products to be kept out of GST. Tobacco products to be subject to GST with input tax credit. On the other hand, Alcohol, emission fuels and tobacco to be subject to dual levy of GST and excise without any credit of the excise component. Also comprehensive 134

20 taxation adopted for real estate and financial services is put forward by Thirteenth Finance Commission Implementation imperatives The implementation of this suggested Model requires following steps: Constitutional Amendments: Consolidate separate entries in the Constitution empowering Union and State Governments to impose taxes on manufacture and sale of goods and services into one entry which empowers both Union and State Governments to impose tax on Alternatively, modify Constitution only to the extent required immediately specifically, to extend CENVAT to consumer level and to authorize States to collect and retain tax on services CHRONOLOGY FOR IMPLEMENTATION OF GST The initial seeds of GST were sowed way back in 1994 in a report of the National Institute of Public Finance and Policy, led by late Dr. Amaresh Bagchi. While recommending a State VAT, the Bagchi committee report 9 recognized that it was not a perfect solution but was feasible option within the framework of the Constitution and would lay the foundation for an even more rational regime in future, which is now envisaged as the GST. A snapshot on the run up to GST in April 2012 has shown in Exhibit Dr. Amaresh Bagchi, et al (1994) 135

21 Exhibit: 3.5 Snap Shot on the Run Up to GST April 2012 GST is slated for introduction - Will it be a reality? Where we are now! Current discussions of the EC are on rates for Central and State April 2008 Empowered committee finalized views on the GST structure February 2008 FM announces introduction of GST from 1st April 2010 in Budget Speech. November 2007 Joint Working Group submits its report on the recommended models to the Finance Minister (FM) May Oct 2007 The Empowered Committee (EC) was formed and consultation with various stakeholders on possible January 2007 First GST Study released by Dr. Shome Concurrent List Systems of GST Apart from the GST models, it is important to understand the systems of GST as well. The various prevalent systems of GST primarily revolve around issues pertaining to availment of credits and payment of taxes. The three systems 10 prevalent internationally are depicted in the Exhibit 3.2 below: 10 V.S. Datey, Service Tax & VAT, Taxmann s Publications, New Delhi, 2009, pg

22 Exhibit: 3.6 Systems of GST Systems of GST Invoice System Payment System Hybrid System Invoice System The input credit can be availed on the basis of invoice when such an invoice is received. Similarly, the output tax needs to be discharged after the invoice is raised. The facts with respect to payments made for procurements and payments received on supplies are immaterial. This is similar to the existing provisions of VAT in India. Payment System Under the payment system of the GST, the input credit on supplies procured can be availed on the basis of payment. Even the output tax needs to be discharged after the payment is received for the supplies made to the customers. The facts with respect to invoices received for procurements and invoices raised for supplies made to customers have no significance. This system is similar to the existing provisions of Service Tax as per the provisions of the Finance Act, Hybrid System This system is the blend of invoice system and payment system. The input credit can be availed on the basis of invoice when such an invoice is received. However, the output tax needs to be discharged after the payment is received for the supplies made to the customers. This system is the most beneficial one from the aspect of the assessee as the credit can be taken immediately on receipt of an invoice but the tax needs to be discharged only after the payment for the supplies received. GST is divided into three types. They are: Central Goods, Service Tax(CGST): All the taxes(additional Excise, Counter Veiling Duty, cesses, Central Excise, Customs) that come under Central Government are included in this kind. 137

23 State Goods, Service Tax(SGST): All the taxes which come under State government(vat, Entertainment Tax, luxury tax, betting-gambling tax, octroi, entry tax, purchase tax, State tax, and lottery tax) are included in this type. Special organization in Central level (IGST): It was conducted by Central government & The taxes that are paid had IGST redemption. It distributes those taxes among the countries. The only thing is that the demands and plans of this IGST are in motion but not yet decided GST tax rates: There will be five types of rates that will collect under this kind. They are as follows: Standard tax rates:most of the taxes come under this category. Limited tax rates: Tax is been collected for the medical & other major basic goods in this category. Special tax rates: Special tax is been collected on the goods & items like tobacco, Liquor, jewellery etc; under this category. Redemption rates: This kind of tax is applicable to the backward areas & there is redemption of taxes for goods under this system & where GST & credit facility is not applicable. All these kinds of procedures will be banned if GST exists. Zero rate: Though tax is not applicable to the goods that are imported there is the facility of refund under this system Working of GST TAX PAYABLE Table: 3.3 Systems of GST GST SGST IGST TOTAL Intra-State sale Interstate sale

24 COMPUTATION OF TAX LIABILITY: PRESENT SCENARIO Vs. GST REGIME INTRA-STATE Present GST Value Excise 8.24%) 8.24 Subsumed 12.5% Subsumed 8% 8 8% 8 Total Taxes INTER STATE Present GST Value Excise Duty(@ 8.24%) 8.24 Subsumed 2% 2.16 Subsumed 16% 16 8% 0 8% 0 Total Taxes 10.4* 16 VALUE OF GOODS 100 * CGST@8% 8 * SGST@8% 8 Source: Abhishek A. Rastogi ACA, TAXMANN S illustrated Guide to Goods & Services Tax (GST),Taxmann Publications Pvt. Ltd, New Delhi-2009,P.I-13. *However there may be other local taxes such as Entry tax & Octroi *CSGT = Central GST/SGT = State GST/IGST = Integrated GST 3.13 OPERATIONAL DEFINITION OF GST GST council. GST Council will make recommendations on all key matters pertaining to GST like taxation rates under both CGST and SGST, exemptions from GST etc. Union Finance Minister will chair the council with Finance Ministers from States as members. The Council members may also elect a Vice-Chairperson of the Council from the members. The Dispute Settlement Authority will be responsible for any 139

25 disputes amidst Union/States/members with respect to GST. The Authority would have one Chairperson and two members. The chairperson should be judge from Supreme Court or Chief Justice from a high court and appointed by President of India on the recommendation of Chief Justice of India. Two other members should be experts from field of law/economics/public affairs on the recommendation of GST Council. This has been done to balance the interests of the parties Service tax. Service tax is levied on specified services, referred to as taxable services, when rendered by a service provider. Service tax is presently taxed at 10%. Ordinarily, service tax is payable by the service provider, except in specified cases. As service provider, credit is allowed on excise duty and countervailing duty paid on inputs and capital goods and the service tax paid on input service. The credit is allowed as a set-off against the service tax payable on taxable services. Empowered Committee of State Finance Ministers The first preliminary discussion on State-level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in In this meeting, the basic issues on VAT were discussed in general terms and this was followed up by periodic interactions of State Finance Ministers. Thereafter, in a significant meeting of all the Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister, two important decisions, among others, were taken. First, before the introduction of State-level VAT, the unhealthy sales tax rate war among the States would have to end, and sales tax rates would need to be harmonised by implementing uniform floor rates of sales tax for different categories of commodities with effect from January 1, Secondly, on the basis of achievement of the first objective, steps would be taken by the States for introduction of State-level VAT after adequate preparation. For implementing these decisions, a Standing Committee of State Finance Ministers was formed which was then made an Empowered Committee of State Finance Ministers. Input tax credit The proposed dual Goods and Service tax (GST) system would be designed in such a manner that the Central GST chain and the State GST chain would be independent of each other. This would imply that a dealer would not be able to use the input tax credit available under the Central GST chain in the State level GST chain. The Central GST chain is likely to integrate the existing excise duty and service taxes levied at the Central level. The State level GST chain is likely to 140

26 integrate the current State-level VAT, other local levies and services tax on certain specific services on which States may get the powers to levy service tax. There will be full input tax credit in the Central GST chain and also in the State level chain but there would be no usability of Central GST into the State-level GST chain. Input tax credit would be allowed only at one chain and no carry forward of the credit from one chain to the other would be allowed. The structure would only address the cascading effect only in the respective chain and not in the parallel one. Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit will be available in case of SGST. Threshold limit A threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories will be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. After taking into consideration the interest of small traders and small scale industries and to avoid dual control, it has been decided that the threshold for Central GST for goods will be Rs.1.5 Crore and the threshold for services should also be appropriately high. Selective Concessions/Exemptions While a linear tax structure with few exemptions would be ideal, the GST structure is likely to continue with sector specific concessions and exemptions. It was observed by Dr.Shome (erstwhile advisor to the finance minister), that shades of policy interventions is a fact of life and we have to weave such positive suggestions in the framework and that by 2010, we will have a structure that will overhaul all taxes into one, of course with some exemptions. No tax will be payable on goods and services which shall be declared as exempted supplies and for such supplies, the assessee will not be able to claim any input tax credit. However certain supplies may be classified as zero rated goods and services thereby making it eligible to input tax credit. Service Tax under GST Service Tax is levied at 10.3% (inclusive of Education Cess) percent tax on more than 100 services. States do not levy or collect service taxes at present, but get a share from the Centre's collections. It is proposed that States will keep the entire collection from certain services from this year. States would also tax another set of proposed new services, collect and appropriate as part of compensation for Central sales tax phase-out in Since there would be issues on taxing cross 141

27 border services it is expected that the State GST would only include services that are essentially of "Local Nature". It has also been reported that Service tax rate under Central GST and State GST is likely to be uniform. Though State Service Tax proposed to be levied on new local services would add to the cost, an redeeming feature is that Input Tax Credit would be eligible on the State Service Tax and a host of other levies like Entry Tax, Electricity Tax, and Luxury Tax etc that would be integrated under State GST. Of course, the service should qualify as an eligible Input Service. Tax Base for Dual GST Levy Though nothing has been explicitly said on the tax base for the State GST, it has been reported that the dual GST Structure would ensure that there is no double taxation and it would help trim the present cascading effect of tax to benefit industry and consumers. So there is a likelihood that the levy of Central GST and State GST would be on the same tax base as only this can help trim the present cascading effect of tax. Implications of GST on imports and exports Imports would be subject to GST. Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded subject to certain conditions, limitations and procedures. System of Zero rating The system of zero rating ensures that the benefit of zero rating is availed only after satisfaction of the condition that the tax is paid in the importing State. The dealer in the importing State will capture the interstate procurements in the periodic return and pay the relevant tax on such procurements. In case the liability to pay tax is not discharged within the stipulated time, zero rating will be reversed and then the seller in the exporting State will be required to pay the tax. For the successful implementation of the system of zero rating with pre-payment, a reliable mechanism should be put in place to identify interstate transactions and thereby ensure that there is no evasion of taxes. Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits 142

28 will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed. Taxation of certain goods: Certain goods like alcoholic beverages, tobacco and petroleum are subject to higher rate of taxes as it attracts multiple taxes like excise duties, license fees, cess, interstate import and export fees etc. This is mainly done to discourage the consumption of such products. Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT can be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there will be no objection to that. Excise Duty, which is presently being levied by the States will also not be affected. Tobacco products will be subjected to GST with Input Tax Credit (ITC). Centre may also be allowed to levy excise duty on tobacco products over and above GST without ITC. Petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate. Similarly, Centre could also continue its levies. Whether natural gas will be within the purview of GST or not has not yet been decided PROPOSED FEATURES IN INDIAN CONTEXT Taxes to be subsumed The Dual GST which would be implemented in India will subsume many consumption taxes. The objective of this tax reform is to reduce complexity and remove the effect of tax cascading. By subsuming a large number of taxes and levies, there would be a larger pool of tax credits allowing a free flow of credit utilization at intra and inter State levels. Further, the objective is to subsume all of those taxes which are currently applicable on sale of goods or rendering of services levied by either federal or State Government. 11 At the federal level, the CGST will primarily subsume the following taxes: Central excise duty Service tax 11 Abhishek A. Rastogi ACA, TAXMANN S illustrated Guide to Goods & Services Tax (GST),Taxmann Publications Pvt. Ltd, New Delhi-2009,P

29 Additional duties of Customs in lieu of excise (or popularly known as CVD) Special Additional Duty of Customs in lieu of Sales Tax/VAT -4%(SAD) Further, at the State level, it is proposed that SGST will subsume the following: State Value Added Tax Entertainment tax Luxury tax Entry tax not in lieu of Octroi Lottery taxes Taxes on betting and gambling Electricity duty(as it is proposed to cover even electricity under GST) State surcharges relation to supply of goods and services Steps for Implementation of GST In order to effect the proposed model of GST, the Government would be required to amend the Constitution to empower the State to levy tax on services and to empower the Centre to levy tax on goods. States are required to be empowered to levy tax on import. Besides Constitutional amendments, GST implementation would also require installation of requisite IT infrastructure both at the Central and State level. 144

30 Exhibit: 3.7 Indirect Taxes Past-Future Central Excise Duty State VAT/Sales tax Additional Excise Duty Entertainment Tax Excise duty on Medicinal and Toiletries Preparations Act Tax on lottery, betting and gambling Countervailing Duty CGST Entry Tax not in lieu of Octroi SGST Special Additional Duty Luxury Tax Service Tax State cesses and surcharges relating to supply of goods and services Other Surcharges & Cess Purchases tax Source: Abhishek A. Rastogi ACA, TAXMANN S illustrated Guide to Goods & Services Tax (GST),Taxmann Publications Pvt. Ltd, New Delhi-2009,P

31 3.15 DESIRABLE FEATURES OF GSTN AN IT INFRASTRUCTURE FOR GST Simplicity for taxpayers: The process of filing of tax returns and payment of tax should be simple and uniform and should be independent of taxpayer s location and size of business. In addition, the compliance process should not place any undue burden on the taxpayer and should be an integral part of his business process. Respect autonomy of States: The design of the IT system should respect the constitutional autonomy of the States. Several business processes will be reengineered as a new IT system for GST is put into place. There should be no dilution of the autonomy of States as a result of the IT system, or the re-engineering. On the contrary, it should strengthen the autonomy of States. This is a key factor in the design of the IT system presented in the rest of this document. Uniformity of policy administration: The business processes surrounding GST need to be standardized. Uniformity of policy administration across States and centre will lead to a better taxpayer experience, and cut down costs of compliance as well as tax administration. Enable digitization and automation of the whole chain: All the business processes surrounding GST should be automated to the extent possible, and all documents processed electronically. This will lead to faster processing and reconciliation of tax information and enable risk based scrutiny by tax authorities. For small taxpayers, facilitation centres can be set up to ease the migration. Reduce leakages: A fully electronic GST can dramatically increase tax collections by reducing leakages. Tools such as matching the input tax credit, data mining and pattern detection will detect tax evasion and thus increase collections. Leverage existing investments: Existing IT investments of States should be leveraged. The Mission Mode Project on Commercial Tax should be aligned with the GST implementation going forward. Exhibit 3.5 depicts the features of GSTN. 146

32 Exhibit: 3.8 Features of GSTN Reduce leakages Simplicity for tax payers Enable digitization of the whole chain GSTN Respect autonomy of States Clear Migration Strategy to GST Uniformity of policy administration Source: Ministry of Finance, The IT Strategy for GST, July STAKEHOLDERS The stakeholders of GSTN are shown in the Exhibit 3.6 below: Small taxpayers: The economic activity in India is concentrated among small taxpayers. They may not have the skill or the resources to effectively migrate to GST. Thus, adequate preparations must be done to ensure smooth migration for small taxpayers to GST. This includes extensive consultations, setting up of facilitation centers, education and training. Corporate taxpayers: Corporate taxpayers may operate across various States and typically have sophisticated IT systems for accounting, e-filing returns, payments etc. Common file formats and message specifications should be released early to allow IT vendors that provide software to corporate taxpayers to modify and release updated versions with GST support. State tax authorities: The State tax authorities would be responsible for collecting SGST. Common file formats, interfaces, and policy administration will enable accurate and timely assessments, and risk-based investigations resulting in enhanced productivity and revenues. 147